Options players take a shine to AKS' December puts

Put players have been descending upon AK Steel Holding Corporation (NYSE:AKS) in droves lately, according to data from the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX). In fact, traders on these exchanges have bought to open more than five puts for every call during the past two weeks. The resultant 10-day put/call volume ratio of 5.06 ranks higher than all readings taken within the last 12 months, signaling speculators have been snapping up puts over calls at an annual-high pace.

Yesterday was more of the same for the steel producer, as approximately 15,000 puts switched hands throughout the course of the session. This was about five times the equity's average daily put volume, and more than triple the number of calls exchanged. Meanwhile, as demand for AKS options surged, the stock's 30-day, at-the-money implied volatility rose by 6.1 percentage points (or 11.3%) to close at 60.2%. Digging deeper into the data, it looks as though one group of traders is expecting AKS to fall back below the $3.50 level over the next few months.

To be more specific, nearly 7,100 contracts crossed at the December 3.50 put for a volume-weighted average price (VWAP) of $0.48. The majority of these puts traded at the ask price, suggesting they were bought. Since open interest at this strike surged by 6,575 contracts overnight, we can assume that most of the volume was comprised of newly added positions.

In order for speculators to secure a profit from their bought-to-open puts, AKS must retreat below breakeven at $3.02 (strike price less the VWAP) by December expiration. This denotes a drop of 17.5% from the stock's current price of $3.66. The delta for these options stands at negative 0.37, meaning they have a nearly 2-in-5 chance of moving into the money ahead of the close on Dec. 20. Still, even if the shares remain north of the $3.50 mark throughout the puts' lifetime, the most yesterday's bears stand to lose is the initial premium paid.

This pessimism toward AK Steel Holding Corporation (NYSE:AKS) is hardly surprising, given the stock's year-to-date loss of roughly 20%, as well as its year-over-year decline of about 34%. However, the security showed some signs of life on Monday, and is presently trading above its 32-week moving average -- a trendline not conquered on a weekly closing basis since January 2012.